IMF Survey: Bosnia and Herzegovina Gets €405 Million Loan from the IMF

IMF News, October 5, 2012

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IMF’s Executive Board approved on September 26 a 24-month €405 million Stand-By Arrangement for Bosnia and Herzegovina.
Program aims:
- Counter the effects of the euro area crisis on Bosnia and Herzegovina.
- Address structural challenges facing the country.
Four-pronged approach:
- Improve national policy coordination across multiple government levels.
- Maintain fiscal discipline while advancing structural fiscal reforms, including reducing current expenditure, allowing more space for capital spending, and making social spending more targeted.
- Safeguard financial stability within the context of the currency board (introduced in 1997) by improving crisis preparedness, banking supervision, and resolution frameworks.
- Intensify reforms to improve the business environment to support growth, investment, and job creation.

Growth and inflation projections:
- Expect economic growth to start recovering in 2013 after stagnation in 2012.
- Project modest growth of about 1 percent in the next year, with inflation remaining low.
Domestic demand constraints:
- High unemployment, fiscal restraint, and slow credit growth expected to keep domestic demand subdued.
External risks:
- Majority of risks tilted to the downside, primarily from a possible intensification of the euro area crisis.
- Channels of transmission include exports, remittances, capital inflows, and foreign banks’ reliance on parent-bank funding and exposure to loss of confidence in home countries.

Membership and early assistance:
- Bosnia and Herzegovina became a member on December 20, 1995; on that same day the Fund approved financial support under a new policy on emergency assistance for post-conflict countries.
Recent programs:
- Last IMF-supported program was a three-year Stand-By Arrangement approved in July 2009; last review completed in October 2010.
- Political delays prevented completion of further reviews until after a new Council of Ministers was confirmed by Parliament in March of the stated year.
- Staff-level agreement reached in July; Executive Board approved the new two-year Stand-By Arrangement on September 26.
Additional support:
- Beyond financial support, the country has benefited from extensive technical assistance and training provided by the IMF.

Fiscal policy and public spending:
- The size of government remains very large; focus should be on reducing current public expenditures.
- Increase capital spending (including on highways) while improving the targeting of social spending.
Financial sector resilience:
- Strengthen contingency planning and crisis preparedness.
- Improve coordination between the central bank and the banking agencies and enhance cooperation with home supervisors.
Structural reforms:
- Address structural impediments that hamper economic performance to achieve more balanced growth and job creation.
Institutional coordination:
- Improve national policy coordination given the country’s complex governance structure (two Entities and ten cantons with most economic power, and a limited-mandate State government).

IMF Survey: Bosnia and Herzegovina Gets €405 Million Loan from the IMF, October 5, 2012